Good corporate governance as a payment strategy

Thursday, October 17, 2019 21:55

By HANNINGTON GAYA |

According to a 2017 economic report by Sage, late payments of invoices continue to cost micro, small and mid-sized (MSMEs) businesses as much as $3 trillion globally. In addition, 1 in 10 invoices fail to be paid at all or paid so late that businesses are forced to write them off as bad debt.

This study, undertaken by Plum Consulting to look at the effects of late payments on SMEs, highlights significant implications for these entrepreneurs and their ability to operate, plan and grow.

In Kenya, the percentage of invoices paid late or never paid at all, is reaching phenomenal figures that the authority has opted for some legal intervention, including an amendment to the Competitions Act.

Away from this negative practice, firms that opt to practice good corporate governance, can mitigate the domino effect or negative impact that late payments of invoices exert on the SMEs.

According to the Principles of Corporate Governance issued by the Organisation of Economic Development (OECD), and subsequently amended in 2016, good corporate governance practice includes equal and equitable treatment of stakeholders, who include creditors and indeed others, among them employees and customers.

OECD and its various advisory and working committees further present the Golden Rules of best corporate governance practice – key concepts in embracing good corporate governance and best practices in business. In these rules, it is opined that embracing these principles will mean the company’s culture and therefore public image will shine out as an example of an open, well and fairly run organisation.

According to OECD, putting these principles to practice enables the public image of a corporation to quite accurately reflect the culture of that firm.

It follows, then, that good corporate governance has to be in the bones and bloodstream of the organisation since this in turn will be reflected in the culture.

To carry the analogy further, in the same way that healthy blood and bones are reflected in the naturally healthy look of a person, so an organisation whose internal functions are healthy will naturally look so from an external perspective.

In making decisions, it behoves on the board to consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.

From this scenario, a firm that lays claim to practising good corporate governance or is underpinned on ethical business practice, ought to pay its debts promptly and willingly, not resorting to financing itself with the very lifeblood of small firms it ought to support and help scale up.

Among the painful impact of delayed payments of outstanding bills is the inability of the MSMEs to grow, pay their own suppliers and staff salaries. In a nutshell, delaying payment of bills only serves to create a vicious cycle of firm stagnation and hence inability to create more wealth and generate new employment, let alone sustaining the existing ones.